Farmers Wonder if Boom
In Grain Prices Is a Bubble

By

Lauren Etter

Updated Jan. 31, 2008 11:59 p.m. ET

Come spring, Tim Recker plans to demolish two rotting barns and a dilapidated workshop on his 1,500-acre farm in Arlington, Iowa. In their place will sit about three acres of rich, black topsoil prime for capitalizing on the biggest global grain boom in decades.

"Every acre is more valuable than it was five years ago," says Mr. Recker, a farmer and land excavator.

With corn, wheat, soybeans, barley, sunflowers and other grains selling at or near record prices, U.S. farmers are preparing for a potentially historic planting season. A rush to make biofuels from crops and soaring demand for grains in China, India and other emerging markets have pushed up grain prices world-wide, helping drive food prices higher.

ENLARGE

A potentially historic season creates opportunities and risks for farmers.

Just yesterday, Kraft Foods Inc. -- echoing similar announcements earlier in the week by Tyson Foods Inc. and Hershey Co. -- said it will raise prices this year because of higher costs, and Kellogg Co. said its fourth-quarter profit fell because of higher commodity prices.

The shift has created huge opportunities in the Farm Belt as growers make their annual decisions about which crops to plant, how much land they need, which fertilizer and pesticides to buy, and how much of their crop to sell ahead of time on futures markets.

But there are risks, too. Farmland prices have climbed more than 20% over the past year in many Midwestern states, so the many growers who lease land are shelling out higher rents. Some seed prices have jumped 30%, and fertilizer prices have doubled nearly across the board. Nocturnal thieves are stealing grains from unlocked bins. And ever looming is the prospect of a drought, which could push prices even higher, sending shock waves through global grain markets.

Farmers are left to wonder: Could the grain boom be another bubble like dot-com and housing? Crop prices have been bouncing up and down in recent weeks: Wednesday of last week, corn trading on the Chicago Board of Trade dropped nearly 20 cents a bushel, the exchange-traded daily limit. The following day, corn was back up 20 cents, to nearly $5 a bushel, about where the March contract closed yesterday.

Craig Ratajczyk, director of global issues at the U.S. Soybean Export Council, says he is warning farmers that grain markets this year will be characterized by "wild gyrations." And despite the high prices they are fetching for their grain, some farmers won't be as profitable because of the higher costs.

Minnesota grain farmer Kevin Paap says he is excited by the "potential" in the grain markets. But he says his "stomach's in a little bit of a knot because of all that risk both on the upside and the downside."

This year, he likely will plant half of his crop in corn and half in soybeans, a change from last year, when he planted more than half of his crop as corn because its profit potential was far more attractive than soybeans. Last year, the market was saying "we need more corn acres," says Mr. Paap. "This year, the markets are telling us they want more everything." He also says soybeans are looking better this year because they tend to withstand dry weather better than corn and because they are generally cheaper to plant, partly because they require less fertilizer.

ENLARGE

It was simpler last year. With ethanol plants sprouting across the Midwest, corn prices were running higher than farmers had seen in a decade and the price of land and fertilizer and other input costs hadn't yet spiked.

Farmers planted about 93 million acres of corn, a 20% increase over the previous year and the most since 1944. Experts figured the big crop would push prices back down, easing pressure on livestock farmers, who feed corn to their animals, and helping ethanol producers remain profitable.

Instead, corn prices stayed well above 2006 levels, in part because demand continued to grow and inventories were at near-historic lows at the end of the harvest. As farmers switched out of soybeans, wheat and other crops to plant corn, the prices of those crops rose, too. For instance, soybean acreage declined 16% as farmers opted for corn. The March soybean contract yesterday settled at $12.758 a bushel, up from $7.21 a year earlier.

Keith Collins, former chief economist at the U.S. Agriculture Department, recently said he expected that planted corn acres in the U.S. would decline as much as 8% this year, while soybean acres would rebound to 70 million acres, up about 10% from last year.

Most agricultural economists agree that key factors underlying the farm boom are likely to persist. "Once people enter the middle class and move up the income and food ladder, they rarely regress," says Rich Feltes, senior vice president and director of commodity research at MF Global.

Landowners world-wide are trying to get as much as possible out of their fields. Farmers are looking to expand fields in Canada, where growers tend to idle more land, and Brazil, where large tracts lie uncultivated. Russia, Algeria and South Africa all have expanded their grain production. In the U.S., farmers like Mr. Recker are razing old barns, ripping up sod and grassland, and uprooting fences -- some in a routine attempt to improve land, others in an effort to make room for the grain boom. "They're trying to squeeze everything they can" out of their land, says Kent Cramer, an excavator in Belmond, Iowa.

Food prices are widely expected to push even higher this year, even if the U.S. enters a recession, economists say, because food is typically one of the last goods to be affected by a downturn.

Still, this month's global stock-market tumult temporarily slowed the steady rise of agriculture-related stocks, which have been outperforming most stocks. The week of Jan. 14, the shares of farm-equipment maker Deere & Co. dropped nearly 20%, but the stock yesterday still was up 73% from a year ago. Seed giant Monsanto Co.'s stock dived 17% that same week. It has doubled since last year.

While seed suppliers see robust sales continuing, Dan Basse, president of Chicago-based AgResource Co., an agricultural-research firm, says this is evidence that the farm economy and the overall economy are still "tied at the hip." He worries that any recession in the U.S. could spill over into Asia and curb demand for food in those places that are driving demand here.

That resonates for Kip Tom, who farms 12,000 acres in Leesburg, Ind. He decided to sell 80% of his 2008 corn crop on the futures market -- locking in a price at more than $5 a bushel -- even though he hasn't planted a seed yet. Normally, he says, he might have sold only about half of his crop this early in the year. "We just think this rally is too good to be true," he says.

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